California's Franchise Tax Board Drops Effort to Limit Property Tax Deductions Based on New IRS Guidance

The Franchise Tax Board has halted an initiative launched in November 2011 to ensure taxpayers do not deduct portions of their property tax bills that are not based on property values, and will issue guidance for taxpayers soon in light of new advice from the Internal Revenue Service that the portions may be deductible for federal income tax purposes.

FTB removed material from its website about the Real Estate Tax Deduction Educational Campaign and will update its instructions and forms once IRS revises its instructions and forms to clarify deductibility of property taxes, the state tax agency said in a posting to its website April 13. The agency also dropped its plans to require 2012 tax returns to include parcel numbers and itemized tax amounts.

Upcoming guidance will advise taxpayers on filing amended returns if they relied on FTB's earlier guidance that portions of their property tax bills were not deductible.

At issue are portions of county property tax bills that are not levied on an ad valorem basis. When it launched the education campaign, FTB said it relied on long-standing IRS guidance that property tax items are deductible only if they are based on property value.